Misrepresenting State Budget Crises

Pay no attention to the tax cuts behind the curtain

When protests against attempts to roll back state workers’ benefits swept across the nation in February and March, local and national media coverage largely portrayed it as the inevitable collision of generous worker benefits and tight economic times.

The Columbus Dispatch (2/20/11), for example, reported that “the protests at the Ohio and Wisconsin capitols portend what lies ahead as governors in both parties move to cut worker benefits or jobs to balance their books.” The Dispatch called employee pension and healthcare benefits “a long-term threat to state budgets,” citing economists with both the right-wing Heritage Foundation and the right-wing American Enterprise Institute as saying that worker pensions are “squeezing” state budgets.

The Washington Post, meanwhile, described (2/23/11) the battles in Wisconsin, Ohio, Indiana and other states as “an important moment for public employee unions, whose interests are being pitted against those of other taxpayers,” and cited (2/26/11) Democratic governors like New York’s Andrew Cuomo as facing “a larger political challenge: how to satisfy the public pressure—and in some cases, legal obligation—to balance budgets without alienating some of their most loyal supporters.”

How, indeed? As any fiscal expert—or journalist assigned to the budget beat—should know, there are two ways to balance a budget: cut spending or raise revenues. Yet media coverage of the state fiscal crises largely overlooked the option of raising taxes to close budget gaps—not to mention the degree to which many states’ current woes have been worsened by past tax cuts, primarily for the wealthy.

By far the biggest cause of state budget deficits—which reached a total of $111 billion this year, with 21 individual states facing gaps of at least $1 billion—is the still-sluggish economy, say state budget watchers. “The overwhelming reason that states are facing a crisis today is that the recession brought an unprecedented collapse in state revenues,” Jon Shure of the Center on Budget and Policy Priorities’ State Fiscal Project told Extra!. (This is a large part of why state pension funds are now suffering, CBPP—1/20/11—notes: Fully funded as recently as 2000, their investment portfolios have since taken a hit from two subsequent recessions.)

At the same time, the need has risen for state services such as unemployment benefits and healthcare. Yet despite this increased need, according to data from the National Association of State Budget Officers, states have already been slashing expenses, such that general fund spending will be 6 percent lower in 2011 than in 2008, without adjusting for inflation (CBPP, 1/20/11).

Even while cutting spending, though, many states have made their own budget holes deeper by simultaneously cutting taxes—mostly on their richest citizens. In Ohio, where newly elected Republican Gov. John Kasich sparked huge protests by proposing cuts to schools and childcare to help close an $8 billion two-year budget gap, the state had cost itself $10 billion in lost revenues over the previous five years after slashing income taxes 21 percent in 2005 (McClatchy Newspapers, 3/30/11). Two-thirds of the benefits of those tax cuts went to the richest one-fifth of state households (Policy Matters Ohio, 1/05).

New Jersey, currently facing a $10.5 billion deficit that Gov. Chris Christie blamed on “the wild spending that we’ve had for the last decade,” cut income taxes by 30 percent in the mid-1990s, costing the state more than $14 billion in lost revenue over the next decade (New Jersey Policy Perspective, 5/9/05); then-Gov. Christine Todd Whitman filled much of the gap by reducing the state’s contributions to its pension funds. “They basically borrowed from the pension system to pay for the tax cuts,” says Shure.

Because they rely more on sales taxes, which disproportionately fall on lower- and middle-class taxpayers, state taxes are already highly regressive: According to Citizens for Tax Justice (4/15/10), in 2009 the poorest fifth of U.S. households paid 12.4 percent of their income in state and local taxes; the richest 1 percent paid just 8.4 percent. (In post-income-tax-cut Ohio, a November 2009 state-by-state study by the Institute on Taxation and Economic Policy found, the spread reached 12.0 percent to 6.4 percent.)

With this in mind, many unions and progressive state budget coalitions called for meeting the current budget crises with increased taxes on higher-income residents—as several states, including New Jersey, Maryland and North Carolina, had done in past years with temporary “millionaire’s tax” surcharges. In New York, in fact, one of the main complaints of budget critics was that Gov. Andrew Cuomo was slashing spending while simultaneously allowing a 2 percent tax surcharge on households earning over $500,000 to expire. A January poll found that New Yorkers supported keeping the tax surcharge by a 55-42 percent margin (New York Daily News, 1/18/11).

The media response was largely to echo conservative warnings that raising income tax rates would drive the rich to move to lower-tax states, weakening the local tax base. Bloomberg News (2/4/11) blamed New Jersey’s slow population growth on its high maximum income tax rate, which stands at 8.97 percent on those earning $500,000 or more after a tax surcharge on top earners was instituted in 2004, quoting a business-group economist as saying: “States are like firms: Bad management equals loss of capital and people.”

Yet a study this April by sociologists Cristobal Young at Stanford and Charles Varner at Princeton found that New Jersey’s rate of out-of-state migration was just as high among those earning just below the $500,000-a-year cutoff as above it. (Even with the surcharge, New Jersey’s rich still paid the least in state and local taxes of any income group—7.4 percent, compared to 10.8 percent for the poorest 20 percent.)

Overall tax receipts for New Jersey, meanwhile, had soared as a result of the tax surcharge. Though the Wall Street Journal’s Robert Frank covered this study in his Wealth Report blog (4/20/11), the newspaper’s print edition—which had previously editorialized (5/26/09) that following a millionaire’s tax in Maryland, “one-third of the millionaires have disappeared from Maryland tax rolls”—failed to report on it.

In fact, some media outlets have gone so far as to credit state leaders with getting tough on balancing budgets even when they’ve cut taxes. Even after New Jersey’s Christie proposed cutting the top state income tax rate to 6 percent last fall, the New York Times wrote of Christie’s “agenda of balancing the budget” (2/22/11) and cited the governor for having “torn into the financial problems he faced with gusto.” How? “He has cut spending, limited taxes, [and] forced government workers to give more and get less.”

Similarly, a front-page story in the Washington Post (2/23/11) reported: “The plain-spoken Christie has emerged as a leader of a growing group of governors attacking yawning budget deficits by facing down public employees and promising not to raise taxes.”

The “root of the long-term budget problems confronting many states,” concluded the, is that “public employees often enjoy more generous pension and health-care benefits.” As for the wealthy state residents who’ve enjoyed generous tax breaks the past two decades, they went unmentioned—unless you count an uncritical reference to Christie’s description of his state’s “overburdened taxpayers.”

One notable exception to the media silence on state tax rates was a New York Times editorial (“The Hollow Cry of ‘Broke,’” 3/3/11) that attempted to point out the true causes of state budget crises: “Some of that is because of excessive spending, and much is because the recession has driven down tax revenues. But a substantial part was caused by deliberate decisions by state and federal lawmakers to drain government of resources by handing out huge tax cuts, mostly to the rich.”

Yet just three days later, another Times editorial (“State Workers and N.Y.’s Fiscal Crisis,” 3/6/11) asserted: “In all, the salaries and benefits of state employees add up to $18.5 billion, or a fifth of New York’s operating budget. Unless those costs are reined in, New York will find itself unable to provide even essential services.” (It’s not clear why it should be so surprising that a substantial portion of state budgets should go to state workers, but that’s a common trope in budget crisis coverage.)

The second editorial did call on Governor Cuomo to retain the tax surcharge on high-income earners—something it said would provide “a serious down payment” on the deficit. (Actually, New York’s Fiscal Policy Institute has estimated it would generate $4-5 billion a year, enough to cover about half the state’s projected annual deficits.) But the paper insisted that “the state’s middle-class workers will have to make real sacrifices” as well.

According to the ITEP figures, New York’s middle class already spends 11.6 percent of its income on state and local taxes, while the state’s millionaires spend just 7.2 percent. But in the world of media logic, paying two-thirds more of your income than the wealthy do isn’t a “real” sacrifice.

Neil deMause is a contributing editor for City Limits magazine, and a frequent contributor to CNNMoney.com on economics and taxes.